Aspect Capital

Resurgence in trend following performance

Hamlin Lovell
Originally published on 09 May 2023

In 1997 the founders of Aspect Capital – Anthony Todd, Martin Lueck and Eugene Lambert – agreed on their philosophy, culture and ambitions to offer trend following strategies to institutional investors, but they struggled to agree on a name for the firm, since many potential monickers were not available. Inspiration came from Lambert’s gliding hobby. “The aspect ratio of a wing measures the ratio of the square of its wingspan to the area of the wing. A higher aspect ratio creates a more stable aeroplane, and crucially results in a higher lift to drag ratio, which is analogous to risk-adjusted measures of investment returns, such as Sharpe ratios,” says Lueck, Research Director. Lambert, who remains an investor in Aspect’s strategies, left the firm in 2004 to spend more time gliding, travelling and writing prize-winning fiction.

(L-R): Anthony Todd and Martin Lueck, Founders, Aspect Capital

Aspect’s first year saw the firm traverse its highest and lowest altitude in terms of confidence. “The worst moment came first when we set up the business in 1997. We were full of enthusiasm, optimism and confidence, and had a great story to tell about working together since the early 1980s, building AHL and wanting to offer diversifying strategies to institutions. However, over the course of one year – from September 1997 to September 1998 – we held 62 meetings with institutions and private equity firms and raised zero capital. This partly reflected the lack of enthusiasm for alternative investments during the late 1990s TMT boom,” recalls Todd, Aspect’s CEO.

It was darkest before dawn and the best moment came soon after in late 1998, when RMF founder, Rainer Mark Frey, was genuinely excited by the idea, and offered $40 million of seed capital (a decent sized ticket in the late 1990s when the average launch was smaller than today) and some working capital, in return for a 25% stake in Aspect. Today, the firm is almost entirely owned by its current employees, a small number of former ones and just one small external shareholder.

Quant investing can be a black box, but we think it is crucially important to bring transparency, explanation and understanding.

Anthony Todd, Co-Founder, Aspect Capital


Aspect’s transparency was quite novel in the 1990s but proved to be crucial to secure the seed capital, which partly came from a Swiss insurer that had rejected other managers due to insufficient transparency: opacity ruled out backing a fashionable fixed income arbitrage strategy (LTCM) that infamously blew up in 1998. “Quant investing can be a black box, but we think it is crucially important to bring transparency, explanation and understanding,” says Todd.

This open dialogue becomes especially important during the performance drawdowns that inevitably go hand in hand with liquid and mainly directional trading strategies. Aspect’s flagship strategy, Aspect Diversified, has recently recovered from its longest and deepest drawdown, which occurred between March 2016 and September 2021. This period showcased the quality of communication inside and outside the company. “High and consistent transparency and communication, and client service are critical to keep investors on side. We have a fiduciary duty to work in partnership with investors, who have sometimes been invested for more than 20 years. Investors have seen good times and bad times for performance before. Well informed and sophisticated investors understand the episodic nature of performance and its utility in portfolios. As we have become better at explaining the strategy, we have seen less performance-chasing after a good run, and investors do not expect it to be a source of fast money profits. The level of client retention was high,” says Lueck.

Anthony Todd, Co-Founder, Aspect Capital

Staff morale also remained buoyant since they, too, understand the intermittent performance pattern of the strategy and are appropriately incentivised. “We have always had a long-term vision for the business and a long-term view about investments. In a competitive marketplace for talent, we offer competitive salaries irrespective of investment performance. Staff do participate in performance fees in a year like 2022, but remuneration is collaborative rather than formulaic and is not a function of independent or siloed efforts. We have a strong balance sheet, and the financial position of the company is presented to all staff on a quarterly basis,” says Todd.

Transparency was always a prerequisite for institutionalisation of the investor base, which had been retail oriented in the early years after Man Group acquired AHL. The arguably somewhat opaque strategy was initially marketed to retail investors through capital guaranteed structured products. Aspect was early to recognize that the strategy should be marketed and structured in a transparent way that was attractive to institutional investors (and Man Group itself also migrated its investor base to institutions). Naturally, institutions sought competitive and transparent fee structures as well as a solid balance sheet, a 24-hour trading desk, and robust disaster recovery systems, amongst other criteria.

Trend and non-trend strategies

After institutionalisation, the next key milestone in Aspect’s development came in 2004 when the flagship strategy evolved from pure trend following to a mix of 80% trend and 20% non-trend “modulating factors”. “In the early 2000s the volatility of trend following increased, and some investors were not comfortable with this versus return expectations. Hence, we started the modulating, complementary strategies, to smooth out returns and make it easier for investors to maintain longer holding periods,” recalls Todd. 

Martin Lueck, Co-Founder, Aspect Capital

The rationale for adding non-trend strategies was not to replace or dilute trend following but rather to complement it and give investors a wider menu of strategy options to mix and match according to their own unique utility functions, including return targets, diversification objectives and risk tolerances. This journey has logically culminated in multi-strategy portfolios, which can complement and diversify both conventional asset classes and trend following strategies.

Today, Aspect’s three main strategy pillars are trend following, systematic macro, and multi-strategy or customized products, and each of these verticals (which have been explored in earlier articles in The Hedge Fund Journal) houses a variety of offerings.

Trend following can still be accessed on a pure play basis without modulating factors, through Aspect Core launched in 2014, and there are “flat fee” products with no performance fee. It can also be applied to alternative markets (where the non-trend sleeve is 10%) and to Chinese futures (where non-trend models are partly calibrated to local markets). The Chinese futures strategies were originally onshore only but can now also be accessed via offshore vehicles.

The relative value systematic global macro strategy can be used to carve out currency capabilities including overlays. The fundamental research program is exploring alternative datasets, investor flows, news articles, and natural language processing. Broader research is expanding the machine learning capability, including a diversified machine learning program, and an intraday trading program, incubated within multi-strategy. 

Customised solutions can be tailored to investors’ specific portfolio requirements and risk mitigation constraints, through funds of one, which may combine one or more of the trend strategies, systematic macro, short term trading, machine learning and volatility trading capabilities, amongst others. 

There is always something more to learn. And as investor appetites evolve, we refine models to continue offering utility.

Martin Lueck, Co-Founder, Aspect Capital

Aspect thus aims to offer a menu of distinct and discrete strategies, which investors can then mix and match into their own combinations. “We are creating different building blocks rather than rolling it all into one single master fund,” says Lueck.

Honing and refining trend models

Lueck, the ‘L’ in AHL, perhaps somewhat humbly, views the AHL success story as, “a happy accident of a systematic, repeatable, diversified, and diversifying strategy” and Aspect’s confidence in the key style of trend has been a constant, though its implementation has become more sophisticated in terms of models, frequencies and execution.

Alongside developing new strategies, the application of trend following is constantly being honed and refined. “Even after all this time, we still invest heavily into ongoing trend research. There is always something more to learn. And as investor appetites evolve, we refine models to continue offering utility,” says Lueck.

For instance, the expansion of the investment universe, into both traditional and alternative markets, in developed and emerging markets, made intuitive sense and the past two years has demonstrated the benefits of being exposed to powerful and persistent trends in Eastern European interest rates, multiple energy markets across various regions and countries, and carbon emissions.

Aspect invests in developing trade execution prowess to drive down market impact and open up more degrees of freedom – in terms of both adding some shorter-term signals and expanding overall program capacity.

Defining appropriate capacity ceilings

Aspect Capital’s peak assets were $10.9 billion in July 2022. “Capacity for Aspect Diversified and Aspect Core taken together is estimated at around $15 billion. Diversified alone has less capacity as the relative value modulating strategies are less scalable,” says Todd.

The other strategies have largely independent capacity, which would probably take overall firm capacity to $20 billion, but asset raising is not a target. Rather it is viewed as a headwind potentially diluting the goal of consistent performance, which needs to be regularly recalibrated to prevailing constraints. 

“Of course, capacity could always be increased by slowing down models or increasing allocations to more liquid markets, but such changes would impair style consistency,” says Lueck. Some CTAs, including some large funds, have increased fixed income and reduced commodities, but Aspect is very keen to retain the diversification benefits of some less well trodden markets.


Aspect Capital’s peak assets in July 2022

Dispersion in CTA returns

Optimal capacity and the choice and weights of markets explain some dispersion in CTA returns but in other cases there are more a priori reasons. Aspect highlights three key differentiators that illustrate how carefully they have developed their trend models over the years: directional bias, time frames, and avoiding over-fitting.

“Some CTAs have a long bias to risk premia, such as equity risk premia, which may make sense over a 20-year time horizon. However over shorter periods any long bias to any asset class – whether it is equities, bonds or commodities – can make it more difficult to generate diversifying returns in years such as 2022,” says Lueck. Philosophically, Aspect is agnostic to market direction and wants trend models to do equally well in rising or falling markets. In fact, Aspect has also introduced overriding caps on long equity and bond exposure into some strategies. 

Trend following time frames are also important. Aspect’s spectrum of trading frequency in trend ranges from one to two weeks to two or three months and goes out to six months or more. A balance is helpful as different speeds work better in different asset classes over different periods, as shown on the firm’s extensive performance attribution breakdowns, including performance per speed and per sector.

Aspect maintains a balance amongst asset classes and speeds because they do not have confidence in extrapolating from recent relative trend performance. “There is very little forward-looking information in recent relative performance of markets and timeframes,” says Lueck, who views this as “overfitting”.

Outlook for trend following

That philosophy also applies to predicting the opportunity set for the overall strategy. It is widely accepted that 2015-2019 or even 2009-2019 was a wilderness period for most trend following strategies (at least in traditional if not alternative markets), due to the level of government intervention. “QE, ZIRP and the Fed Put prevented trends from developing. On a longer historical perspective this period can be seen as an aberration, and the recent performance resurgence may have some reversion to the norm. Investors could easily have lost faith in trend following, but we look at the longer-term arc of the strategy,” says Todd.

Aspect never had any doubts about the behavioural drivers of trend following. “Humans have not evolved that much over this period. Common trends are manifested due to investors’ ability to assimilate information, anchoring, and differing diffusion speeds for information. The utility of trend is as valuable as it ever was,” says Lueck.

The new macroeconomic and policy configuration seems benign for the strategy. “Now we have moved from QE to QT and divergence is opening up between central bank policies – with China easing while the US tightens – uncorrelated sources of return are more easily available in a more disparate, idiosyncratic and diversified climate,” says Todd.

“We may even see epic trends of a biblical nature that were seen in the 1970s and 1980s,” ventures Lueck. Whether CTAs can repeat the returns of those decades is open to debate since the average volatility of programs has somewhat declined. “But we are optimistic for an opportunity set of that order,” he says. 

Investment consultants and the investor base

Regardless of recent performance, the institutional quality of CTAs has now been recognised by leading investment consultants, who have been helpful in recommending trend following as part of strategic allocations to risk mitigating portfolios. CTA allocations might stand alone or could be part of crisis risk offset or risk mitigating strategies. Some investors and consultants group CTAs as part of a family of strategies, which may include trend following, systematic global macro, discretionary global macro, alternative risk premia, and long only ultra-long duration bonds.

Since inception, Aspect’s main investor focus has been institutional investors, pension funds, insurance companies, endowments and foundations. The main investors are US pension funds, European pension funds, and private wealth managers, who understand the important role CTAs play in portfolios. Some distributors, such as the largest private wealth manager in Australia, do have some retail investors (though Aspect does not deal directly with retail clients). 

The investor pipeline is the strongest that Aspect has seen in 5 years, but this may not be manifested in immediate allocations. “After the TMT bubble burst and after the GFC, it took a year or two before investors adjusted and heavily invested into CTAs. After 2008 some investors needed to use CTAs as an ATM. The big inflows came in 2011-2012 as they adjusted their medium-term and long-term allocations,” recalls Todd. Naturally, some investors also need to top slice CTA allocations to maintain target weights after a period when CTAs have considerably outperformed long only equities and bonds, which had their worst double act in decades last year.

Looking forward to the next 25 years, notwithstanding strategy diversification, development and innovation, the concept of trend following still occupies centre stage. Aspect reiterates its confidence in the utility of trend following, and is offering a range of solutions complementing trend following, all of which meet its investment mission of providing liquid sources of returns and diversification. 

ESG in portfolios and the firm

Aspect is proactively engaging with investors on ESG perspectives and requirements. Lueck finds that the arguments can be far more nuanced for a dynamic futures trading strategy than they would be for a long only equity or corporate bond strategy: “Should we be short but not long of energy? Should we invest in equity indices excluding ESG stocks? Should we avoid currencies of countries with larger carbon footprints?”. No clear consensus has emerged on how to answer these questions.

At the firm level, Aspect became a certified ‘B’ Corporation in June 2022, based on a B-Lab assessment of its responses to 220 questions covering governance, workers, community, environment and customers. In the simplest terms a B Corp prioritises people and planet as well as profit. “We saw it as consistent and resonant with the founding ethos, principles and values of Aspect when we set up the company. The values and culture of the company include teamwork, integrity, working in partnership, mutual respect, and giving back to the community. 25 years ago we set up a charity committee to put something back. We are maximizing stakeholder value, not only shareholder value,” says Todd. 

The corporate culture has helped to encourage longevity of tenure amongst staff: six have worked at Aspect for over 20 years and 20 for over 15 years. Travel sabbaticals are one example of a distinctive policy designed to broaden employee horizons rather than maximise profit. “After five years everyone gets a four-week paid sabbatical to carry out life changing travel, and staff submit their plans for this to the board. Some have been to Bhutan, Japan, New Zealand, travelled the Silk Road, visited Latin America, or even Antarctica,” says Todd.

Diverse thinking, DEI and apprenticeships
The three founders all studied physics, as did some subsequent hires, though Aspect has recruited from a wide range of disciplines and academic backgrounds, including astrophysics, electrical engineering, data science, statistics, computational finance and mathematics. “We welcome a wide dispersion and variety of views. We do not want group think, but the common quality of our hires is intellectual curiosity, inquisitive minds and a scientific bent to question how something works and if it can be done better,” says Lueck.

Beyond intellectual diversity, Aspect’s DEI (diversity, equity and inclusion) breakdown of its staff is impressive. “This reflects a conscious effort. We go to additional lengths to broaden the pool of candidates as widely as possible, through initiatives such as 10,000 Black Interns and apprenticeship schemes, to draw the net wider. This simply broadens the recruitment opportunity set rather than applying an explicit bias to diverse candidates,” says Todd.

Apprenticeships can provide financial support for university students as well as career paths prior to, or without, attending university. There are about 6 apprentices working in the firm currently, and Aspect just hired two of them. There are 4 apprentices working in the firm currently, and 2 others recently transitioned into permanent roles.